What Every Online Seller Ought To Know About The Substitution Effect

The Newsletter is online. You can download a printable copy here. I’ve also included the entire text in this post as well. I hope you enjoy this one. It reveals some powerful keys to success!

Jason & Cinnamon

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There is an economic law called the “Substitution effect” which secretly undermines the work of some online sellers, while helping others.

Let me explain it and suggest ways you can “break the law”. The Substitution Effect says:

As buyers’ incomes decline (or overall prices in a marketplace rise) the buyer will replace expensive items with less expensive options.

In practical terms it means we all look for cheaper options when we’re feeling “tight” on funds. It’s a basic consumer behavior.

Substitution Effect Winners

When buyers are feeling the pressure to look for less expensive options a few winners emerge in every market – the lower priced sellers.

These sellers offer good products at discounted prices and as shoppers hunt for cheaper options they repeatedly chose these discount sellers.

Substitution Effect Losers

The first assumption is that it is the high priced sellers that are the losers. But guess what? it’s not!

The high priced sellers in each market don’t frequently feel the most dramatic impact of the substitution effect. These ultra-premium sellers are somewhat immune because they weren’t ever selling on “price”. They always tend to sell using techniques more aligned with “status” “quality” and “personal satisfaction”.

These sellers also tend to have powerful branding, high quality images, big email lists, and professional copywriting. All of these assets work together to help them combat the negative forces at play.

So who is the victim in the Substitution Effect scenario? The big victim is the mid-priced seller.

The mid-priced seller isn’t using “price” as their selling tool, nor are they using powerful “psychological selling tools” and well-honed business assets. They are simply benefiting from the flow of general consumer demand.

Four Ways To Avoid The Damage Caused By The Substitution Effect

So how do you stay clear of the negative impact of the Substitution Effect? Here are four ways,

#1 – Avoid The Deadly Middle: when it comes to pricing your work either become a low-cost provider, or work to be the ultra-premium provider. Avoid the deadly middle and you’ll suffer the smallest impact as buyers shift their behavior.

#2 – Be A Better Bonder: People buy from people and as they make purchasing decisions they consider who they are helping or hurting if you have a fantastic bond with the customer they are less likely to leave you for a generic alternative. Good bonds are forged by fantastic customer service, iron-clad refund policies, generosity and most importantly infusing your brand with personality!

#3 – Build Business Assets: If you can build an email list of several thousand (or tens of thousands) enthusiastic buyers – you’ve got a super weapon to combat the substitution effect. What are other ways you can build business assets? Work hard on your logo, clarify and strengthen the impact of your founder’s story, and increase your social media influence. You should also develop the discipline of having a certain amount of your monthly expenses used to advertise – say 5-10%. Learning how to advertise your work is part of a disciplined marketing program.

#4 Serve The Customer Instead of Just Selling A Product: The most important way to avoid the substitution effect is incredibly simple. If you serve the customer, rather than selling a specific product, then you will be open to changing your product offerings as the market changes. In other words you can offer lower priced alternatives as needed. Just make the differences between your higher and lower priced products very clear.

Conclusion: The Substitution Effect is a powerful economic force that YOU have to proactively combat if you want to maintain or grow revenue. You can do it!

Jason & Cinnamon

31 Comments

I just don’t think I have the knack of putting outfits together in a way that appeals to the buyer. Sometimes I hit it right but not consistently. I do try to look at what is selling to get ideas. I think the quality of my work is outstanding – I use only top quality fabrics. I have the techniques and take pride in my work and have many repeat buyers once they find me. I think I am ‘into’ too many things sometimes and don’t list enough either….

Great comments. As you might guess – Cinnamon is the brains of our operation when it comes to being ‘on-trend’. All I know is that her best advice is to always go super current/trendy or go historical – the middle ground is where I think lots of people get caught with products that don’t sell. Sorry I can’t be of more help.

Sounds like you’re on the right track. Jim’s the guy who we’ve learned (almost) everything from – so we can’t recommend him more highly. He’s the best. Hang in there – if you keep taking one step forward at a time – it will pay off!

The thing I find most challenging in growing my pattern business is both how to advertise and when. My focus is not on making the doll clothes, but making the patterns for both the dolls and the girls. As I’ve been developing my pattern business, I’ve found that I stabilize my sales by releasing patterns slowly and not by doing all of my patterns all at once. I’m curios as to what Pixie Faire offers as an adverstising opportunity to the Pattern Vendor as opposed to the Clothing maker?
Also curios as to when the best time to advertise would be? Should it be seasonal or steady?

Email marketing is the best / biggest bang-for-your-buck advertising method you can easily employ. If you have several hundred, (or several thousand) eager shoppers on an email list and you send out one quick email to them about your products – you’ll see tons of success. And the reason I like it so much is that it is so dang cheap. It just takes a little elbow grease to get it set up. Mailchimp is free for everyone up to 2k names on your contact list.

What I find most difficult is getting noticed on Etsy. Reading your book helped me to understand some things better and I have implemented a few changes thanks to your tips. I have had a few more sales and repeat customers, so I think it is starting to work!

I also struggle with time management because I work full time in addition to my craft business. Sometimes it is just exhausting because I stay up way too late at night sewing. It is hard to sleep with all those creative ideas floating around in my brain.

Hey – that’s great! I always appreciate hearing that kind of feedback. So the very best “time management” stuff I’ve found on Amazon/Kindle is by a guy named SJ Scott. You might really like his ebooks. “Habit Stacking” is his current big hit ebook. It’s pretty short, but it gives some good ideas. He’s got a lot more too – and frequently they are free (or .99 cents). Let me mention two other books that have helped me with time management stuff 1) The 4-Hour Workweek by Tim Ferris. His chapters are all focused on his concept of “Definition, Elimination, Automation, Liberation” (DEAL). Finally, 80/20 Sales & Marketing by Perry Marshall is very good. Hope that helps.

I think the hardest thing is to get traffic and but then to get sales. How to distinguish yourself from the others. I have made a few clothes but afraid to list them fearing that no one would be interested in buying. I had tried selling a few other non-American doll clothes on etsy. My most success has been with selling Barbie doll clothes. Finding that niche market is hard. Also, I like making a lot of different things so I can’t pinpoint what I really want to sell, yet if I get no sales, it really deters me from making more stuff.

Great comments – and a hard challenge. You might try to watching successful sellers on Etsy and eBay to see what people are buying from them. Then do something somewhat similar. Another way to do basic research – if you have an email list (or Facebook following) is to simply do a survey – either formal or just informal. You can do a formal survey using survey monkey. Ultimately people can always tell you they like something and will buy it – but until you actually get them to purchase – you don’t really know. My final thought is that if you run an eBay auction for items you’ll definitely get a feel for customer interest. This is a gamble, but you will learn a ton. One time we had an auction that ended for $8 – and we learned far more than if we would have made more money. Hope these ideas help!

My main difficulty is pricing. I’ve seen Etsy sellers whose clothing is so cheap that I know it must be impossible to make a profit. I also have seen such gorgeous outfits that are priced really high but the quality of workmanship is amazing. I tend to be on the higher side but explain to my customers that each item is professionally constructed and also Limited Editions. This philosophy has helped me launch my business and maintain my brand.

One thought comes to mind – if you’re just selling on Etsy – then that might be part of your answer – the hardest place to maintain good prices is on an Etsy style marketplace where there are no price constraints and people can offer items at silly prices. I realize I’m suggesting a big project – but migrating to your own e-commerce site – where you can more fully control the customer experience might be the long term solution. Our best recommendation is Shopify – we absolutely LOVE it. I’d be happy to elaborate if that’s something of interest to you.

I find it very difficult to get much traffic. We have a modest budget for publicity. We can’t afford to have a larger advertising budget until we start selling more things, and we can’t sell more things if we aren’t found. It is a vicious cycle. Right now all of our advertising is through Etsy.

As I mentioned to Marsha – I think the very best advertising method (and most affordable) is to implement a good email marketing program. Over time as you add more and more people to your list – you’ll drive more traffic than you could via paid advertising.

My biggest challenge right now is finding the time to get everything done I want to do. I thought I’d get more things done after I retired but that’s not happening. I’ve been working with a guy on Fivver.com who designed a great (but simple) logo for my soon-to-be Etsy store. He’s agreed to assist me in getting the site operational so hope to get it going sometime this month. I took your advise and ordered the Eric Michael Etsy book. You’re correct … It’s awesome! I got some great ideas for ways to word things and additional places to get my things marketed. I’m also taking the current Design Academy and am very happy with that so far. I know it’s going to take time and effort to get things going so I figure I’m continuing to make progress if I can get a couple of things accomplished each day.

One of my challenges is keeping track of inventory. My sisters and I make mostly one-of-a-kind items and sell on Etsy and at craft shows. There are 2 issues:
1. I usually try to put Etsy on vacation when I’m taking items to a show, then delete items that have sold as soon as I get back to a computer, but a couple of times I’ve forgotten and have had to tell a customer that I couldn’t send an item and ask if they’d like something else, or a refund. I can’t seem to build enough inventory, to leave the Etsy items behind. I do try to use the shows to drive traffic to the Etsy site.
2. I’ve been using an Excel spreadsheet to track items, fees, and sales to know what share of the money should go to the sisters. It seems cumbersome and I’m wondering if there is a better way.

This seems like a tricky challenge. There are some online tools that might help with this – we don’t use them – but we’ve heard good things about Stitchlabs – http://www.stitchlabs.com … I wonder if anyone else reading this blog post has any other recommendations?

First off, I very much enjoy these newsletters and have learned lots of valuable information from them, so thank you. What I struggle with most is time: I have four young children so getting to the sewing machine for a few hours at a time per day is nearly impossible for me. I feel that I produce high quality outfits for the AG doll and do fine with presentation, however, my self confidence is lacking. I’m terrible when it comes to comparing–I always think “so and so is a much better seamstress than I am” or “how can I succeed in this business when there are so many other more talented people than me?” It sounds foolish, I know, but it really does discourage me sometimes. Not only that, but also letting go of the competition and seeing that we should all work together and not against each other…I truly believe that is the best way, however, my pride is sometimes a stumbling block! Sheesh, I feel like I’m confessing to a priest here! 🙂

Ahh, that’s funny. Nope, not a priest. Maybe this blog is therapeutic! My comments to Karen about time management might be of help. In terms of self-confidence – I think it’s sometimes funny that the very best designers often feel inferior…your work is amazing – and your photography is really incredible. If there is anything we can do to be of help – please let us know. 🙂

Thanks, Jason. You and Cinnamon are fabulous to work with and I appreciate you taking the time to respond to this. I appreciate the words of encouragement. I’ll have to check out the resources you mentioned to Karen about time management–I appreciate you guys.

My biggest problem is getting traffic and then getting them to buy. I sell complete outfits and a few shoes alone. I tried posting an item a day for a while, but between advertising and fees, I am not breaking even.

Sorry if it sounds like a broken record as I share my comments, but as I’ve mentioned to a few others, email marketing is absolutely the best (low cost) advertising method you can implement. Over time your list of fans and followers will take your sales to incredible heights – all you’ve got to do is be faithful to work on growing your list and sending them updates.

We completely agree. As I’ve mentioned before – the best solution for that is to use Etsy as a lead generating tool and then build up your own online ecommerce site to sell to your fans and followers – at prices that are fair to you (and them).

My biggest challenge is getting started, so many online options, choosing the “right” one, learning enough to get set up safely, fear of online security issues.
All this was interrupted in May with breast cancer. It’s so hard to focus when I try to read anything, especially technical stuff. I am going through radiation treatments now. Hopefully, the clouds will clear sometime and I can make some sense of all of it and make a decision and run with it. Thanks for all your good reading materials. –cath

My biggest problem is that there is never enough time to do all the things that need done. I just started my new store this year and have a few items in it with lots more planned. I have been enjoying the newsletters will be implementing alot of your ideas as time allows.

Sounds like you’re off to a great start! You might enjoy the Habit Stacking book and other resources I mentioned to Karen in a prior comment. There are some great tools, and books out there on the topic.